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Exhibit D-1.3
COMM-OPINION-ORDER, 91 FERC (P)61,036, Commonwealth Edison Company on
Behalf of Itself and Its Public Utility Subsidiaries and PECO Energy Company On
Behalf of Itself and Its Public Utility Subsidiaries, Docket No. EC00-26-000,
(Apr. 12, 2000)
Commonwealth Edison Company on Behalf of Itself and Its Public Utility
Subsidiaries and PECO Energy Company On Behalf of Itself and Its Public Utility
Subsidiaries, Docket No. EC00-26-000
Order Authorizing Merger
(Issued April 12, 2000)
Before Commissioners: James J. Hoecker, Chairman; William L. Massey, Linda
Breathitt, and Curt Hebert, Jr.
On November 22, 1999, Commonwealth Edison Company (ComEd) on behalf of
itself and its public utility subsidiaries, and PECO Energy Company (PECO) on
behalf of itself and its public utility subsidiaries, (collectively, Applicants)
filed a joint application pursuant to Section 203 of the Federal Power Act
(FPA)/1/ for approval of the merger of Applicants. As discussed below, the
Commission has reviewed the proposed merger under the Commission's Merger Policy
Statement./2/ In this order, we will approve the merger, as proposed.
I. Background
A. Description of the Parties to the Merger
1. ComEd
ComEd is a "public utility" under Section 201 of the FPA and a majority-
owned subsidiary (greater than 99 percent) of Unicom Corporation ("Unicom").
ComEd and its affiliates supply wholesale and retail power and transmission
services principally in northern Illinois. The State of Illinois has begun
implementing a direct, retail access program. All of ComEd's non-residential
customers will become eligible for direct access by December 31, 2000, and all
of its residential customers by May 1, 2002. Both ComEd and its Unicom
affiliate, Unicom Power Marketing, Inc. (UPM), have authority to sell power at
market-based rates./3/
ComEd currently owns 9,214 megawatts (MW) of generating capacity, all
nuclear, after recently selling all of its remaining non-nuclear generating
facilities to Edison Mission Energy, Inc. (Mission Energy)./4/ In order to
secure state regulatory approval for the Mission Energy sale, ComEd has entered
into
_______________________
1 16 U.S.C. (S)824b (1994).
2 Inquiry Concerning the Commission's Merger Policy Under the Federal Power
Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (1996), FERC
Statutes and Regulations, Regulations Preambles January 1991-June 1996
(P)31,044 (1996), reconsideration denied, Order No. 592-A, 62 Fed. Reg.
33,341 (1997), 79 FERC (P)61,321 (1997) (Merger Policy Statement).
3 See Commonwealth Edison Co., 82 FERC 61,317 (1998); and Unicom Power
Marketing, Inc., 81 FERC (P)61,048 (1997).
4 The Commission has approved ComEd's disposition of jurisdictional assets
associated with the generating units to be sold to Mission Energy. See
Commonwealth Edison Co., et al., 89 FERC (P)62,105 (1999).
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a series of power purchase agreements intended to maintain ComEd's ability
to reliably serve its load during the beginning years of Illinois' transition to
full retail access. These agreements provide ComEd with the right to dispatch
and receive electric energy from the generating facilities sold to Mission
Energy through the summer of 2004. ComEd has similar rights, under power
purchase agreements which extend through 2013, to capacity and energy from the
Kincaid and State Line coal-fired power plants it sold to subsidiaries of
Dominion Resources, Inc. and the Southern Company in 1997./5/
ComEd's transmission system interconnects with several other large,
adjacent utilities, including Alliant Energy Corporation (Alliant), Wisconsin
Electric Power Company (Wisconsin Electric) and American Electric Power Company
(AEP). Currently, ComEd provides both wholesale and unbundled retail
transmission service under the rates, terms and conditions of ComEd's open
access transmission tariff ("OATT") on file with the Commission./6/ However,
ComEd has committed to transfer control of its transmission facilities to the
Midwest Independent Transmission System Operator, Inc. (Midwest ISO)./7/
Applicants state that the Midwest ISO is expected to commence operation by June
1, 2001./8/ In addition, on December 13, 1999, ComEd and other interested
parties filed a proposal in Docket No. EL00-25-000 to create an independent
transmission company (ITC), seeking a Commission order declaring that the ITC,
coupled with oversight by the Midwest ISO, will satisfy the minimum
characteristics and functions of a regional transmission organization (RTO)./9/
Under this proposal, Applicants state that ComEd will transfer its transmission
system and control of its control area functions to the proposed ITC, which will
operate under the Midwest ISO's oversight./10/ If the merger is approved, ComEd
commits that if the Commission concludes that the ITC/Midwest ISO combination
does not meet the minimum RTO requirements, it will endeavor to modify its
proposal in order to meet those requirements.
2. PECO and AmerGen
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5 See Kincaid Generation, L.L.C., 78 FERC (P)62,060 (1997); and State Line
Energy, L.L.C., 78 FERC (P)62,037 (1997).
6 The Commission has recently accepted changes to the OATT to implement
retail transmission access. See Commonwealth Edison Co., 88 FERC
(P)61,296 (1999).
7 Application at 11. Applicants state that ComEd's membership in the
Midwest ISO is unqualified and unconditional. Applicants' Answer to
Motions for Rehearing and/or Other Action (Applicants' Answer) at 7-8.
The Commission interprets that this commitment has been made,
irrespective of whether the merger is approved.
8 Application at 11.
9 In this regard, the Commission approved appendix I to the Midwest ISO
operating agreement, creating a framework for membership and operation of
ITCs within the Midwest ISO, under which ComEd and the other petitioners
seek to operate their proposed structure for an RTO. The Commission also
granted in part the petition for a declaratory order and provided
guidance to the petitioners for revising the ITC/ISO proposal to meet
Order No. 2000 requirements. See Commonwealth Edison Co., et al., 90 FERC
(P)61,192 (2000).
10 We note that in the Application Applicants have stated that ComEd will
turn over functional control of its transmission system to the Midwest
ISO. Ex. APP-400 at 11. However, the ITC proposal provides that the ITC
would have primary operational authority, with oversight by the Midwest
ISO. In its ruling on the ITC petition, the Commission directed
petitioners to clarify the specific division of functions between the
Midwest ISO and the ITC at the time they submit their filings to
establish the ITC. See 90 FERC at p. 61,619.
2
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PECO is a "public utility" under Section 201 of the FPA and provides
wholesale and retail power service and retail natural gas service in
Pennsylvania. Pursuant to the Electricity Generation Customer Choice and
Competition Act and as a part of a Pennsylvania Public Utilities Commission
("PaPUC") approved settlement, PECO has implemented a retail access program.
Under this program, as of January 1, 2000, all retail customers in PECO's
territory have the freedom to choose their power supply provider. PECO remains
the provider of electric distribution services in its service territory. PECO
serves seven requirements-type wholesale customers, all under its market-based
tariff,/11/ in Pennsylvania and New Jersey.
PECO and its subsidiaries currently own approximately 9,500 MW of
generating capacity consisting of a mix of fossil, nuclear, hydro and combustion
turbine generators. PECO also holds a 50 percent interest in AmerGen Energy
Company, L.L.C. (AmerGen), a limited liability company formed by PECO and
British Energy, Inc., to own and operate nuclear and other generating assets in
the United States./12/ AmerGen has purchased the 930 MW Clinton nuclear
generating station from Illinois Power Company and will sell 75 percent of the
output of the Clinton station to Illinois Power through 2004./13/ AmerGen also
has acquired the Three Mile Island Unit No. 1 nuclear unit and has entered into
agreements to acquire the following nuclear generating stations: Nine Mile Point
Unit Nos. 1 and 2; Oyster Creek; and Vermont Yankee. In addition, PECO is
acquiring an additional 80 MW ownership interest in the Peach Bottom nuclear
station.
All of PECO's generating capacity (except for the Clinton nuclear capacity)
is subject to oversight and dispatch by the PJM Interconnection, LLC (PJM), an
independent system operator (ISO) that also operates a control area covering the
middle Atlantic region of the country. Although PECO owns transmission
facilities, PJM controls the operation of PECO's transmission system and
provides transmission service over PECO's and other members' facilities under
the PJM OATT.
B. Description of Proposed Merger and Post-Merger Operations
1. The Merger
Under the Agreement and Plan of Exchange and Merger, dated September 22,
1999 ("Merger Plan"), PECO will enter into a mandatory share exchange with a
PECO subsidiary, Exelon Corporation (Exelon). Each outstanding share of PECO
common stock will be exchanged for one share of Exelon common stock. Immediately
thereafter, Unicom, ComEd's parent, will merge with and into Exelon. Each
outstanding share of Unicom common stock will be exchanged for 0.875 shares of
Exelon common stock and $3.00 in cash./14/ The result of these transactions is
that PECO, ComEd and the existing utility and non-utility subsidiaries of Unicom
will become subsidiaries of Exelon. The current holders of PECO and Unicom
common stock will together own all of the outstanding shares of Exelon common
stock. Exelon will be a public utility holding company system subject to
regulation and registration under the Public Utility Holding Company Act of
1935, 15 U.S.C. (S)79a, et seq. ("PUHCA").
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11 See Letter Orders issued to PECO Energy Company in Docket No. ER95-770-
000 on May 15, 1995, in Docket No. ER97-316-000 on February 14, 1997, and
in Docket No. ER97-316-001 on March 18, 1999.
12 British Energy, Inc., a wholly owned subsidiary of British Energy plc.,
owns no electric generation or transmission assets anywhere in the United
States, other than through its AmerGen joint venture with PECO.
13 Illinois Power Co. and AmerGen Energy Co., L.L.C., 89 FERC (P)61,104
(1999).
14 Applicants' Securities and Exchange Commission application, filed as Ex.
G to their merger application in this proceeding, at 4.
3
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2. Post-Merger Interconnected Operations and Transmission Services
Applicants state that ComEd and PECO will operate as an interconnected
utility system within the meaning of PUHCA. Although Applicants' systems are not
contiguous, they have engaged in transactions with each other by means of
transmission services taken from intervening third-party transmission systems.
The most significant of these is a 10-year sale from ComEd to PECO of 300 MW. At
the time of the filing, Applicants did not know with certainty whether the
Securities and Exchange Commission (SEC) will find that Applicants are currently
"interconnected" or "capable of interconnection," as those terms are defined in
PUHCA. Applicants state that, if necessary to avoid delay in obtaining SEC
authorization, they will commit (to the SEC) to acquire a firm, 100 MW
transmission path from ComEd to PJM for three years following the merger's
effective date.
Both ComEd and PECO will continue to provide open access transmission
services under their individual respective tariffs (in PECO's case, the PJM
OATT). Applicants state that because PECO already has transferred control of its
transmission system to PJM, and ComEd has committed to transfer control of its
transmission facilities to the Midwest ISO, it is infeasible for them to file a
combined-system OATT.
3. Applicants' Restructuring Plans
At or about the time the merger closes, both of the Applicants will undergo
internal reorganizations. Currently, PECO has functionally divided its
operations within its existing corporate structure into three parts: (a) the
regulated transmission and distribution function; (b) the generation function;
and (c) unregulated ventures. PECO's restructuring plan will formalize this
functional separation into separate corporate entities within a holding company
structure. After restructuring, PECO, which will continue in existence as a
subsidiary of the holding company, will continue to own and operate all
distribution assets. It also will continue to own its transmission facilities,
but PJM will continue to operate such facilities. PECO will fulfill the
"provider of last resort" functions mandated by Pennsylvania law and will remain
regulated by the PaPUC.
As part of the PECO restructuring, PECO's generation assets and operations
will be transferred to a new subsidiary, referred to herein as GenCo. GenCo will
own PECO's existing fossil and nuclear generating plants. Also, PECO's power
marketing functions, currently pursued through a division of PECO known as the
Power Team, will become a part of GenCo. To the extent necessary, PECO will
enter into power purchase agreements with GenCo, as well as other generators, to
obtain power supplies./15/
In addition to its ITC initiative, ComEd also plans to restructure
generation and distribution operations./16/ ComEd will transfer its generation
facilities to the same GenCo that PECO will create. The means of this transfer
of control has not yet been determined. It could take the form of an asset
transfer, a lease, or a sale of all output to GenCo. Regardless, after
restructuring, the existing ComEd will be a distribution company. ComEd will
then obtain generation supplies necessary to serve its customers in accordance
with power purchase agreements with GenCo, through at least 2004. ComEd will
also assign its rights under various power purchase agreements, including those
with Mission Energy, to GenCo. Applicants state that the transfer of control of
ComEd's generating facilities to GenCo will not occur unless the merger is
approved. ComEd will continue to own and operate its transmission facilities
until such time that its proposed ITC is established and the Midwest ISO becomes
operational.
4. Related Filings and Commitments
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15 PECO's application for restructuring was filed in Docket No. EC00-38-000
and conditionally approved by the Commission on March 17, 2000. PECO
Energy Co., et al., 90 FERC (P)61,269 (2000).
16 The Commission is considering ComEd's proposal in Docket No. EC00-41-000
in an order to be issued contemporaneously with this order.
4
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Applicants recognize that their proposed merger represents a departure from
the facts relied upon by the Commission in granting market-based rate authority
to PECO and to ComEd and its affiliate, UPM. They state that, consistent with
Commission policy addressing transactions between utilities proposing to merge,
ComEd and PECO have committed not to sell power to each other while the merger
is pending and thereafter if the merger is consummated, unless the Commission
authorizes such sales. ComEd and PECO have also committed that any authorized
sales which do occur at market-based prices are subject to an independent,
verifiable rate cap. Further, ComEd and PECO have agreed that when they sell
non-power goods and services to each other, the buyer will not pay more than the
market price. These commitments were set forth in filings approved by the
Commission in Docket Nos. ER99-1872-001 (PECO) and ER98-1734-001 and ER97-3954-
010 (ComEd)./17/ ComEd filed its amended service agreement in Docket No. ER00-
182-000, and PECO filed its amended agreement in Docket No. ER00-194-000./18/
Applicants have further committed that, effective as of the date of the
Application, they will, for purposes of Order No. 889,/19/ treat each other as
if they were already affiliated companies. Therefore, ComEd's transmission
function personnel will treat PECO's merchant function personnel in the same
manner that ComEd's transmission function personnel treat ComEd's merchant
function personnel. PECO's transmission function personnel will treat ComEd's
merchant function personnel in the same manner. Upon consummation of the
proposed merger, Applicants will file combined Order No. 889 Standards of
Conduct.
II. Notices of Filing, Interventions, and Answers
Notice of Applicants' merger filing was published in the Federal Register,
64 Fed. Reg. 67,256 (1999), with comments, interventions, and protests due on or
before January 21, 2000. Motions to intervene were filed by the parties listed
in the appendix to this order. The American Public Power Association (APPA), the
Illinois Cities (Cities), the Illinois Municipal Electric Agency (IMEA), Mid-
Atlantic Power Supply Association (MAPSA), Wisconsin Public Power Inc. (WPPI),
and the Electricity Consumers Resource Council (ELCON) filed protests to
Applicants' proposal./20/ On February 7, 2000, Applicants filed an answer to the
protests and comments.
III. Discussion
A. Procedural Matters
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17 Those filings were approved by separate, unpublished Commission letter
orders issued November 22, 1999.
18 Those filings were approved by separate, unpublished Commission letter
orders issued on December 16, 1999.
19 Open Access Same-Time Information System (Formerly Real-Time Information
Network) and Standards of Conduct, 61 Fed. Reg. 21737 (May 10, 1996),
FERC Statutes and Regulations, Regulations Preambles January 1991-June
1996 (P)31,035 (April 24, 1996); Order No. 889-A, order on reh'g, 62 Fed.
Reg. 12484 (March 14, 1997), FERC Statutes and Regulations (P)31,049
(March 4, 1997); Order No. 889-B, reh'g denied, 62 Fed. Reg. 64715
(December 9, 1997), FERC Statutes and Regulations (P)31,253 (November 25,
1997).
20 Hoosier Energy Rural Electric Cooperative, Inc. (Hoosier) filed an
intervention, motion to consolidate, and protest to Applicants' filing,
but on March 15, 2000, Hoosier filed a notice of withdrawal of its
filing. This notice was unopposed and thus the withdrawal was deemed
approved on March 30, 2000. 18 C.F.R. (S)385.216 (1999). On February 18,
2000, the National Railroad Passenger Corporation filed to delete the
paragraph of its intervention which raised a substantive issue concerning
the merger application.
5
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Pursuant to Rule 214 of the Commission's Rules of Practice and
Procedure,/21/ the timely, unopposed motions to intervene and notices of
intervention serve to make those who filed them parties to this proceeding. Due
to the absence of any undue prejudice or delay, the Commission will grant the
late, unopposed motions to intervene and protests in this proceeding of the
parties filing late listed in the appendix of this order. Notwithstanding Rule
213 of the Commission's Rules of Practice and Procedure,/22/ we will accept
Applicants' February 7, 2000 answer, since it assists the Commission in
understanding Applicants' merger application.
Several parties filed motions to consolidate the instant merger application
with various proceedings, including the petition of ComEd and other public
utilities for a Declaratory Order in Docket No. EL00-25-000, et al., or with the
Docket No. EC00-41-000 proceeding involving ComEd's proposed corporate
restructuring. These motions need not be addressed since the Commission is
approving Applicants' merger proposal without establishing hearing procedures in
this order, has already addressed the petition in Docket No. EL00-25-000, et
al., and is contemporaneously addressing ComEd's proposal in Docket No. EC00-41-
000.
B. The Merger
1. Standard of Review
Section 203(a) of the FPA provides, in relevant part, as follows:
No public utility shall sell, lease, or otherwise dispose of the whole of
its facilities subject to the jurisdiction of the Commission, or any part
thereof of a value in excess of $50,000, or by any means whatsoever,
directly or indirectly, merge or consolidate such facilities or any part
thereof with those of any other person, or purchase, acquire, or take any
security of any other public utility, without first having secured an order
of the Commission authorizing it to do so./23/
Under Section 203(a), the Commission must approve a proposed merger if it finds
that the merger "will be consistent with the public interest." /24/
In 1996, the Commission issued its Merger Policy Statement updating and
clarifying its procedures, criteria and policies applicable to public utility
mergers. The Merger Policy Statement provides that the Commission will generally
take account of three factors in analyzing proposed mergers: (a) the effect on
competition; (b) the effect on rates; and (c) the effect on regulation.
For the reasons discussed below, we find that Applicants' proposed merger
and mitigation commitments are consistent with the public interest. Accordingly,
we will approve the merger without further investigation.
2. Effect on Competition
a. Effects of Combining Generation
Applicants identify non-firm energy as the relevant product and use
economic capacity and available economic capacity as a proxy for a supplier's
ability to participate in the relevant product market.
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21 18 C.F.R. (S)385.214 (1999).
22 18 C.F.R. (S)385.213(2) (1999).
23 16 U.S.C. (S)824b (1994).
24 Id.
6
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Applicants identify and define 42 relevant geographic ("destination") markets
using the approach in Appendix A of the Merger Policy Statement./25/ Applicants
evaluate these destination markets over 11 separate time periods: super-peak,
peak and off-peak periods for summer, winter and shoulder seasons, along with
two extreme summer super peaks./26/ Rather than using system lambda or observed
prices to approximate market prices in relevant markets, Applicants use a range
of prices from $15 per MWh to $100 per MWh./27/
Applicants perform an analysis without taking into account a 100 MW
transmission path which may become necessary to comply with the integration
requirements of PUHCA. They report competitive screen violations for economic
capacity only in the ComEd destination market in ten of the 11 periods analyzed.
Post-merger HHIs in the ten time periods with screen failures range from 4,395
to 5,671 with pre-to post-merger changes ranging from 179 to 297./28/ Next,
Applicants present results under the assumption that the 100 MW transmission
path is in place. They adjust the available transfer capability (ATC) based on
load flow analyses resulting from the firm 100 MW power flow from ComEd to
PECO./29/ The results are nearly identical, with screen violations only
occurring in the ComEd destination market in the same ten time periods as in the
no-integration case. Applicants argue that the screen failures in the ComEd
market are caused by the treatment accorded PECO's 300 MW power purchase
contract with ComEd. Under the post-merger scenario, this 300 MW is combined
with ComEd's economic capacity./30/ Applicants note that they are willing to
sell the contract if the Commission deems it necessary to avoid an evidentiary
hearing./31/
Applicants also conduct sensitivity tests of their results. They examine
cases where total transfer capability is used rather than the standard ATC and
where transmission rates are assumed to be zero. Both of these assumptions have
the effect of increasing the amount of economic capacity that can reach the
relevant destination markets./32/ Applicants report results that are
qualitatively unchanged and conclude that the lack of sensitivity to changes in
the transmission assumption show that the results are robust.
______________________
25 The markets include all first-tier utilities to ComEd and PECO along with
additional destination markets representing historical customers of the
Applicants.
26 The extreme summer super peaks represent the top 25 and top 125 load
hours.
27 Applicants explain that both system lambdas and trade data have
limitations. They present a table (Ex. No. APP-312) with Load Weighted
System
28 A screen failure occurs whenever the post-merger HHI exceeds 1800 and the
change in HHI exceeds 50. See Merger Policy Statement at p. 30,119, n.33.
29 Ex. APP-302 at 17.
30 Applicants state that lack of a screen failure in the highest summer peak
period is due to the fact that ComEd has a recall provision on the energy
sold under this contract during periods of supply shortages in order to
meet native load. In addition, Applicants state that although PECO has
generally taken delivery of the energy in the AEP control area, they
adopted the more conservative (less favorable to Applicants) assumption
that the energy was actually delivered in the ComEd destination market.
Applicants note that if they had assumed an AEP delivery point, there
would not have been screen failures in the ComEd destination market since
the 300 MW would have been severely "squeezed out" by the transmission
allocation procedures in Applicants' computer model.
31 They state that a condition of the sale would be that the buyer be small
enough not to trigger an Appendix A screen violation based on the
associated increase in economic capacity. Application at 8.
/32/ In general, this assumption could increase or decrease the market
concentration depending on the
7
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Applicants also report concentration statistics for available economic
capacity (AEC) in the relevant destination markets with and without the 100 MW
transmission path. In both cases, there are screen violations in numerous
destination markets beyond those in the ComEd market. Applicants do not present
results for AEC under the proposed mitigation involving sale of the 300 MW
contract. Instead they argue that AEC is not a reliable measure, especially
during times of state-level restructuring. They argue that since AEC includes
all capacity not committed to serving native load, and since state retail
competition releases native load, AEC and economic capacity are essentially the
same under retail competition. In addition, they contend that the uncertainty
regarding the pace and scope of state-level restructuring makes any estimate of
AEC highly speculative and therefore does not provide useful information.
b. Effects of Combining Generation and Transmission
Applicants claim that the combination of their generation and transmission
assets does not create any vertical competitive concerns. They consider possible
scenarios under which the merger could create or enhance the incentive and/or
ability to adversely affect electricity prices by exercising vertical market
power. Applicants address the possibility that the merged firm would
strategically dispatch ComEd's generation units in order to create congestion so
that PECO could sell energy into Midwestern markets at higher prices./33/ They
argue that ComEd currently has little, if any, ability to do so, since it only
operates nuclear units, which have little dispatch flexibility. Also, they
argue that withholding baseload capacity is rarely a profit-maximizing strategy,
so they would also have little, if any, incentive to engage in anti-competitive
dispatch. Further, Applicants state that ComEd will transfer its transmission
system and control of its control area functions to the proposed ITC, which will
operate under the Midwest ISO's oversight. According to Applicants, the Midwest
ISO and ITC, once they are in operation, will be monitoring the operation of
generation and transmission and will be able to detect any attempted
manipulations.
Similarly, Applicants argue that PECO has no ability to engage in anti-
competitive dispatch, since its generation operates under the oversight of the
PJM ISO. They note that the PJM ISO performs area control functions for its
members and operates under approved congestion management rules to detect
attempts to dispatch generation to cause congestion.
Applicants also address the possibility of Applicants operating their
transmission system to adversely affect electricity prices. They argue that PJM,
not PECO, controls the operation of PECO's transmission system so PECO has no
ability to use its transmission system to frustrate competition. Applicants
acknowledge that ComEd has some degree of operational control over its
transmission system because it is a Scheduling Coordinator. However, they
present evidence that ComEd has not shown preferential treatment to its merchant
function in granting transmission service requests on its system./34/ In
addition, Applicants note that ComEd has committed to turn over complete
operational control of its transmission system to the proposed ITC, subject to
oversight by the Midwest ISO. Applicants conclude that ComEd currently has
little ability to strategically manipulate its transmission system, has not used
what ability it currently has to do so, and will have even less ability once it
forms the ITC.
_______________________________________________________________________________
relative size of the increase in the Applicants' economic capacity to the
increase in size of the entire market.
33 While most of PECO's generation is located within PJM, the PECO-AmerGen
Clinton nuclear unit located in Illinois can provide economic capacity
into Midwestern destination markets.
34 Their analysis shows an acceptance rate for firm transmission service of
98.8 percent for ComEd requests as opposed to 98.2 percent for requests
from competing firms. Their analysis also shows an acceptance rate for
non-firm transmission service of 99.0 percent for ComEd requests as
opposed to 94.2 percent for requests from competing firms. Applicants
state that there is a statistically significant difference in the refusal
rates for non-firm service but argue that all but three of the 280
refusals were for hourly or daily service for which MAIN, not ComEd,
calculates ATC. Ex. APP-400 at 31.
8
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Applicants acknowledge low levels of firm ATC into Wisconsin during the
summer months. ComEd is currently constructing two 345 kV transmission lines
that will significantly increase ATC into Wisconsin. Applicants state that ComEd
expects the lines to be in operation before or shortly after consummation of the
proposed merger. Applicants commit that if these lines are not completed by the
consummation of the proposed merger, ComEd and all of its affiliates would forgo
any new off-system sales that would reduce ATC on the Illinois-Wisconsin
interface, except in the case of emergency sales requested by other
utilities./35/
c. Effects of Combining Generation and Natural Gas Facilities
Applicants do not perform a quantitative analysis of the competitive
effects of the combination of ComEd's generation with PECO's natural gas
facilities. They note that PECO provides gas distribution services to only one
small (28 MW) electric generator. They state that PECO is an LDC with most of
the electric generators in its service territory presently bypassing PECO and
connecting directly to an interstate gas pipeline./36/
d. Intervenors' Comments and Protests
Cities challenge Applicants' horizontal competitive analysis. They present
concentration statistics for the ComEd market in the summer high peak season in
which the proposed sale of the 300 MW contract does not remove the screen
violation. They also present results with a screen failure in the same market
and time period under the assumption that ComEd's fossil generating plants have
been sold to Mission Energy. In both of these cases, Cities use total capacity
rather than economic capacity and they assign the capacity of the Clinton
Nuclear Unit owned by AmerGen (an affiliate of PECO) to Applicants./37/ Cities
conclude that since the proposed sale would not mitigate the increase in market
power caused by the merger, the merger cannot be approved based on the record
presented and necessitates a hearing.
Cities further argue that Applicants did not address the effects of the
interconnection of the two systems in their analysis.
WPPI argues that Applicants do not address the impact of economic dispatch
of the Applicants' combined generation assets on the transmission network. They
state that loop flow created by joint dispatch will decrease transfer capability
into Eastern Wisconsin, an area that is import-constrained. They also argue that
the divestiture of ComEd's generation assets and the combination of PECO's and
ComEd's remaining generation assets will increase east-to-west and north-to-
south power flows in the ComEd area, thus creating loop flows that would reduce
the transfer capability into Eastern Wisconsin. WPPI further argues that the
proposed mitigation of foregoing off-system sales does not address the effects
on import capability caused by the post-merger change in generation to load
dispatch by the merged firm. In addition, WPPI argues that since ComEd is
capacity deficient during peak hours, it will need to make intra-system
purchases (from GenCo) which may exacerbate the problem of importing power into
Wisconsin.
A number of intervenors (ELCON, APPA, IMEA, MAPSA and Cities) argue that
ComEd's proposal to form an ITC within the Midwest ISO undermines the vertical
market power mitigating effect of ComEd's participation in the Midwest ISO. APPA
and WPPI express fear that the ITC will undercut or
___________________________
35 Ex. APP-400 at 26.
36 Ex. APP-300 at 51.
37 They assign the capacity in question to the purchasers of the power who
hold a contract that expires within five years. Assigning the capacity to
Applicants raises their total capacity by 700 MW. Cities argue that total
capacity is a reasonable substitute for economic capacity during the
highest summer peak periods, since during those periods prices are
sufficiently high to make all capacity economic.
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destroy any movement of the Commission-approved Midwest ISO concept into a fully
functioning ISO and an RTO consistent with the standards articulated in Order
No. 2000. ELCON and Cities argue that the merger case should be consolidated
with the ITC filing. APPA contends that the Commission should review Applicants'
analysis in the context of the proposal to form an ITC within the Midwest ISO.
APPA also argues that Applicants' proposal to satisfy PUHCA integration
requirements by committing to reserve a 100 MW firm transmission path for three
years is intended specifically to avoid the Commission's market power screens.
According to APPA, PUHCA requires actual integration and coordination and when
purchased transmission capacity is used to achieve this purpose, PUHCA requires
a permanent, firm, bi-directional transmission reservation between the operating
companies. APPA asserts that the screen analysis submitted by Applicants does
not satisfy that requirement. APPA requests that Applicants be required to
submit an analysis which reflects reasonable integration requirements and that
analysis be evaluated in a hearing.
e. Applicants' Response
In response, Applicants point out two critical flaws in Cities' analysis.
First, they argue that since Cities is modeling the summer peak period, the 300
MW contract should not be assigned to PECO because ComEd holds recall rights to
that energy which would likely be exercised during Summer Super Peak. Second,
they argue that Cities does not assign the 300 MW contract that would be sold
under Applicants' mitigation proposal to any market participant. Applicants
argue that these assumptions overstate both the concentration level and the
merger-related change in market concentration.
Nonetheless, to alleviate Cities' concern about market power impacts of the
merger, Applicants offer an "open season" to the Cities which Applicants claim
will ensure that no adverse consequences will occur in the ComEd market. Under
the open season commitment, ComEd will release the Cities from their wholesale
power contracts if so requested prior to the effective date of the merger, with
the date of release to be effective on the effective date of the merger. The
open season would also extend one year from the effective date of the merger,
during which the Cities, upon 60 days' advance notice of a decision to cancel,
would be released from their contracts. Applicants state that ComEd will not
seek to recover any stranded generation costs.
Applicants note in response to WPPI's concerns that changes in ATC into
Wisconsin are insignificant./38/ In their application, they explain that the
transfer of 100 MW from ComEd to PECO would lead to a 1 MW increase in both firm
and non-firm ATC from ComEd to Wisconsin Electric for the Summer 2000 time
period./39/
To further alleviate concerns that Applicants will be able to create
transmission congestion through control of generation, Applicants propose a
mitigation measure intended to ensure that they will not be able to manipulate
any non-nuclear generation used by ComEd as a core source of supply. Such
generation includes over 9700 MW of recently divested capacity sold to Mission
Energy, to which ComEd retains energy entitlements and recall rights through the
end of 2004 under several power purchase agreements. Under the proposed
mitigation measure (to take effect if the Merger is approved and closes), ComEd
will relinquish its recall rights to energy from the non-peaking units covered
by these power purchase agreements in excess of the energy needed for ComEd to
satisfy its: (a) native load; (b) off-system sales; and (c) reliability
obligations (NERC performance standards, reliability-related operating
requirements and energy balancing needs)./40/
________________________
38 Ex. APP-400 at 50.
39 Exs. APP-409 at 2 and APP-410 at 2.
40 The reliability determinations would be assumed by the ITC when it
becomes operational. Ex. APP-411
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Applicants contend that any specific issues regarding the ITC should be
addressed in the ITC filing, and, therefore, oppose consolidation of the merger
and ITC proceedings. They assert that the ITC proposal is pro-competitive in
response to APPA's claim that the merger should be reviewed in the context of
the ITC. They reaffirm their commitment to endeavor to modify the ITC proposal
to meet minimum RTO requirements and observe that even if the ITC proposal were
to be rejected in total, the status quo with respect to the development of a
regional transmission network in the Midwest will be at least maintained. In
this regard, Applicants note that the status quo includes ComEd's unconditional
membership in the Midwest ISO and its committed and active participation
therein./41/
f. Discussion
Applicants have investigated the horizontal effects of their proposed
merger associated with consolidating generation controlled by ComEd and PECO and
the vertical effects associated with consolidating transmission and generation
controlled by the merging companies. Intervenors challenge various aspects of
Applicants' analysis and raise additional issues they believe to be relevant. We
respond to those concerns in our discussion of the horizontal and vertical
issues.
(i) Issues Related to Combining Generation
In regard to horizontal issues, we note that using economic capacity as a
proxy for suppliers' participation in relevant geographic markets, merger-
related increases in concentration exceed the Guidelines thresholds in the ComEd
destination market in 10 of 11 time periods. Applicants contend that these
results stem from employing a "conservative" assumption regarding the control
area where PECO takes delivery of its 300 MW power purchase from ComEd.
Nonetheless, Applicants propose to sell the 300 MW ComEd-to-PECO power purchase
contract, if necessary, in order to avoid an evidentiary hearing.
Based on the facts of this particular case, we find that merger-induced
increases in market concentration indicated by Applicants' analysis do not
indicate that the merged company could raise and sustain higher market prices.
Notwithstanding the analytical issues associated with the source of merger-
induced increases in concentration in the ComEd market, we note that it would
not be profitable for the merged company to withhold output in an attempt to
drive up market prices. Our analysis of market supply and demand conditions in
the ComEd destination market indicates that almost all of the merged company's
economic capacity is relatively low-cost nuclear capacity and, for most hours of
the year, market demand falls well within the critical region of market supply
accounted for by such capacity./42/ As a result, market prices would respond
insignificantly to a withholding strategy, undertaken alone or in coordination
with other market suppliers. As we stated in the Merger Policy Statement:
If the concentration analysis indicates that a proposed merger may
significantly increase concentration in any of the relevant markets, the
Guidelines suggest examination of other factors that either address the
potential for adverse competitive harm or that could mitigate or
________________________________________________________________________________
and Answer at 14-16. Ex. APP-411 was filed as privileged information at
the time of the Application. Applicants note that none of the intervenors
have any issue concerning its adequacy.
41 Applicants' Answer at 5-8.
42 An examination of market supply conditions shows three reasons why a
profitable withholding strategy by ComEd would be unlikely: (a) for most
hours during the year, the supply curve is relatively flat, so
withholding capacity would not significantly raise the market price; (b)
for those hours during which it could successfully raise the market
price, ComEd would have to forgo sales from its low-cost nuclear
capacity; and (c) ComEd's only generation is nuclear which is difficult
to ramp down or up so as to withhold output during the most profitable
time periods.
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counterbalance the potential competitive harm./43/
Based on these conclusions regarding the merged firm's inability to raise
prices in relevant electricity markets, we find no need to require Applicants to
sell the 300 MW ComEd/PECO power purchase contract.
Regarding Applicants' results based on available economic capacity showing
that the Guidelines thresholds are exceeded in more than the ComEd market, such
instances occur over a scattering of markets and time periods. Without a
consistent pattern of merger-induced increases in concentration that exceed the
Guidelines thresholds, we are generally not concerned that a proposed merger
poses competitive concerns. Regarding Cities' analysis showing screen failures
in the ComEd market even with the sale of the 300 MW contract, we agree with
Applicants that Cities' analysis is flawed in that the analysis simply
eliminates the 300 MW from the market without assigning the capacity to another
market participant./44/
We also note that since ComEd has recall rights to the 300 MW during the
highest summer peak period, PECO did not compete in the ComEd destination market
during the highest summer peak period and thus the merger can not eliminate a
competitor during this period.
On the basis of the foregoing, we do not believe that the horizontal
aspects of the proposed merger related to consolidating generation will
adversely affect competition.
(ii) Issues Related to Combining Generation and Transmission
We have stated in previous cases that a proposed merger can raise vertical
competitive concerns associated with consolidating generation with an input
(e.g., delivered gas or transmission) necessary for the production and/or
delivery of electricity./45/ In such cases, our general concern is that the
merger may create or enhance the ability and/or incentive for the merger to
adversely affect electricity prices through, for example, raising rivals' costs,
foreclosure or anti-competitive coordination. /46/
Applicants have investigated the possibility that combining their
generation and transmission systems raises vertical competitive concerns. For
example, Applicants note that combining their generation assets on either side
of a constrained region could theoretically enhance their incentive to
strategically dispatch generation to exacerbate existing constraints in the
region in order to raise market prices. We find compelling Applicants' arguments
that ComEd currently has little, if any, ability to engage in strategic
generation dispatch, since it only operates nuclear units, which have little
dispatch flexibility. Similarly PECO has no ability to engage in anti-
competitive dispatch, since the dispatch of its generation units is subject to
oversight by the PJM ISO We therefore agree with Applicants that the merged firm
will not have the ability to strategically dispatch generation to frustrate
competition and adversely affect electricity prices. Since both incentive and
ability are necessary conditions for the merged firm to adversely affect such
prices, we conclude that the proposed merger would not adversely affect
competition through the strategic dispatch of generation. /47/
___________________________
43 Merger Policy Statement at p. 30, 129.
44 Applicants' Answer at 33.
45 San Diego Gas & Electric Company and Enova Energy, Inc., et al., 79 FERC
(P)61,372 (1997), order denying reh'g, 85 FERC (P)61,037 (1998) (Enova) and
American Electric Power Company and Central and Southwest Corporation,
Opinion No. 442, 90 FERC (P)61,242 (2000) (AEP/CSW).
46 AEP/CSW, 90 FERC (P)61,242 (2000).
47 We will accept Applicants' commitment to waive recall rights, on the
terms previously stated, on the
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With regard to Applicants' ability to use their transmission systems
strategically to frustrate competition, we note that PECO has already turned
over control of its transmission system to PJM. Moreover, ComEd has committed to
turn over control of its transmission system-either to the proposed ITC
(operating under the Midwest ISO's oversight) or if the ITC coupled with
oversight by the Midwest ISO does not meet the RTO standards, to the Midwest
ISO./48/ These commitments satisfy us that the merged company will not be able
to use its transmission system to frustrate competition/49/ and we rely upon
these facts in approving the merger.
WPPI asserts that the proposed merger would increase power flows from east-
to west and south-to-north, thereby adversely affecting transfer capability into
Wisconsin. We are not convinced that such an outcome would result, such that the
merged company could sell at higher prices into the highly concentrated
Wisconsin destination markets. First, it is not clear that it is the proposed
merger that would increase power flows from east-to-west and south-to-north and
WPPI has offered no substantive analysis to support its assertion. Moreover,
Applicants' analysis shows that merger-related changes in ATC into the Wisconsin
markets are insignificant./50/ Second, as even WPPI recognizes, it is the
divestiture of ComEd's fossil units, not the proposed merger, that causes the
need for additional imports into ComEd's territory and, therefore, adversely
affects transfer capability into Wisconsin. Finally, we find compelling
Applicants' reasoning that ComEd does not have sufficient ability to
strategically use its transmission system or generation dispatch to frustrate
competition. As a result, we do not believe that the merger would have vertical
anti-competitive effects in the Wisconsin destination markets. However, with
regard to ComEd's plans to complete the 345 kV transmission lines at the
Illinois/Wisconsin interface, we will accept Applicants' commitment to forgo any
new off system sales that would reduce ATC into Wisconsin if the lines are not
completed by the time of merger consummation./51/
We disagree with Intervenors' comments and protests that our review of
ComEd's proposal to form an ITC within the Midwest ISO should be consolidated
with the proceeding to determine whether to approve the merger. Rather, the
appropriate place for a review of the merits of the ITC proposal is in the ITC
filing rather than the merger proceedings. In this regard, the Commission has
reviewed the ITC proposal and provided guidance to the petitioners to assist
their efforts in revising the proposal to form an RTO which will meet Order No.
2000 requirements./52/
_______________________________________________________________________________
fossil units recently divested by ComEd. Ex. APP-411 and Applicants'
Answer at 7-8. This commitment should ensure that the merged company
cannot use such recall rights to adversely affect market prices in the
ComEd destination market.
48 Exs. APP-300 at 51 and APP-400 at 11 and 16. As we noted previously,
supra, note 10, before the Commission can find that the ITC coupled with
oversight by the Midwest ISO meets our standards, we will require
clarification on the division of functions between the ITC and Midwest
ISO.
49 In addition, we note that ComEd is not a Security Coordinator and that
MAIN, not ComEd, calculates ATC for ComEd's interfaces.
50 Exs. APP-400 at 50, APP-409 at 2 and APP-410 at 2. For example,
Applicants estimate a 1 MW increase in both firm and non-firm ATC from
ComEd to Wisconsin Electric for Summer 2000 resulting from the 100 MW
transfer from ComEd to PECO.
51 WPPI has argued that this proposed mitigation measure does not solve the
problem of decreased ATC into Wisconsin, since ComEd would not be
engaging in any off-system sales when it is capacity deficient during
peak summer periods. However, Applicants show that there is both firm and
non-firm ATC on the Illinois/Wisconsin interface during Summer 2000 and
ComEd is not capacity deficient during all hours of the summer. Thus,
Applicants' commitment is not meaningless.
52 Commonwealth Edison Co., et al., 90 FERC (P)61,192 (February 24, 2000).
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The Commission also finds APPA's arguments that the Commission should
require Applicants to submit an analysis of the proposed merger based on PUHCA's
integration requirements as misplaced. As we stated in our ruling approving the
recent merger of Northern States Power Company and New Centuries Energies,/53/
Section 203 of the FPA does not contain explicit integration requirements. Our
analysis assumes that the proposed merger is implemented as proposed and our
approval is based on the facts presented. If the SEC requires changes to
Applicants' proposal, the Commission has the right under Section 203(b) to issue
appropriate supplemental orders.
On the basis of the foregoing, we do not believe that the vertical aspects
associated with combining Applicants' generation and transmission systems would
adversely affect competition.
(iii) Issues Related to the Combination of Generation and Natural Gas
Facilities
Applicants argue that the only potential vertical issue regarding the
combination of natural gas and generation assets is combining PECO's limited
role as an LDC in eastern Pennsylvania with ComEd's generation. We agree with
Applicants' claim that since PECO only provides gas distribution to one 28 MW
electric generator, the combination of PECO's natural gas facilities with
ComEd's electric generation facilities does not pose serious concerns regarding
raising rivals' costs or anti-competitive coordination.
3. Effect of the Merger on Rates
The Merger Policy Statement explains the Commission's concern that there be
adequate ratepayer protection from any adverse effects caused by the merger. It
describes various commitments that may be an acceptable means of protecting
ratepayers, such as hold harmless provisions, open seasons for wholesale
customers, rate freezes and rate reductions./54/
ComEd and PECO both supply wholesale power at negotiated, fixed rates to
several municipal electric utilities or groups. PECO's wholesale power
agreements all expire no later than December 31, 2004. ComEd's contract with its
one Michigan full requirements customer also expires in 2004, and its contracts
with three Illinois full requirements customers expire in 2007. The Illinois
wholesale customers may terminate their contracts at the end of any contract
year, beginning after the 14th contract year, with 24 months' notice./55/
Another feature of the Illinois contracts is a revenue cap, which limits the
monthly bill for power and energy to 95 percent of the bill which would result
if ComEd's retail Rate 6L were applied, a rate which is frozen through 2004.
Under a contract that expires in 2005, ComEd also supplies some of the power
needs of one other Illinois municipal electric utility under fixed rates for
energy and rates for capacity which can vary only to reflect changes in the
transmission charge. In addition, ComEd provides some of the power needs of the
IMEA under a fixed-rate contract that expires in 2007.
Applicants state that under the fixed rate contracts, not only are their
customers insulated from changes in underlying costs, but ComEd's requirements
customers have additional protection in the form of the revenue cap and open
season rights. Nonetheless, Applicants commit that they will not charge any of
their wholesale customers with merger costs unless there are merger savings
sufficient to at least offset those costs. This hold harmless commitment extends
through the life of each contract or December 31, 2004, whichever occurs first.
Applicants further indicate that after ComEd's existing wholesale contracts
expire, ComEd will not enter into any new contracts to market power and energy
at wholesale.
____________________
53 Northern States Power Co., et al., 90 FERC (P)61,020 (2000).
54 Merger Policy Statement at pp. 30,123-24.
55 Assuming no notice has been given at this time, this provision
effectively means that the earliest date any of the contracts could be
terminated is June 2002.
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ComEd currently supplies cost-based transmission service under its OATT,
but after the Midwest ISO becomes operational, transmission service over ComEd's
system will be provided under the Midwest ISO OATT. PECO does not directly
control the provision of transmission service over its facilities, as it has
turned over the operational control of its transmission system to PJM. Except
for a single instance, all use of the PECO transmission system, including use by
PECO, is taken and paid for under the PJM OATT. However, each regional
transmission owner in PJM, including PECO, retains the right to initiate filings
under Section 205 of the FPA to change the revenue requirements associated with
the provision of transmission service under the PJM OATT. The sole exception to
provision of transmission service over PECO's facilities under the PJM OATT
involves service PECO provides to one entity under a jurisdictional bilateral
contract with fixed rates. Applicants state that PECO does not have the right to
seek increases in the rates under this contract until September 5, 2003.
Applicants state that no changes to the PJM ISO or Midwest ISO operating
agreements are planned as a result of the merger. They also indicate that the
costs which underlie their transmission revenue requirements are unlikely to
change materially as a result of the merger and thus suggest that there is
unlikely to be any merger-related impact on the rates paid by transmission
customers under the PJM OATT and the ComEd OATT or Midwest ISO OATT.
Nonetheless, Applicants commit that through 2004, they will not seek to include
in their transmission revenue requirement any merger-related transmission costs
that are not fully offset by merger-related transmission savings. Applicants
also commit that when the Midwest ISO OATT goes into effect, ComEd will notify
the Midwest ISO of any such merger-related costs not offset by merger-related
transmission savings so that the Midwest ISO can exclude such costs from ComEd's
zonal rate and for computation of the Midwest ISO average rates. In addition,
Applicants further commit that PECO will not exercise its right to seek a rate
increase in its bilateral transmission contract as long as the current contract
remains in effect after the closing of the merger.
Three intervenors raise questions about the merger's effect on rates and
the adequacy of the ratepayer protection offered by Applicants. MAPSA alleges
that certain inconsistencies between statements in the Application and testimony
in support of the Application make the hold harmless commitments of Applicants
ambiguous with respect to preventing the imposition of merger-related generation
costs on PECO transmission customers./56/ Applicants answer that MAPSA's
allegation appears, illogically to assume that the Commission would authorize a
base transmission rate on the basis of generation costs. However, Applicants
confirm that PECO's transmission customers under the PJM tariff are to be held
harmless with respect to any adverse cost effects attributable to the merger.
The Commission finds that Applicants' answer dispositive of MAPSA's concern.
The Pennsylvania Office of Consumer Advocate (PaCA) requests that the
Commission investigate the extent of merger-related costs after first requiring
Applicants to file additional information on costs and savings. The Commission
rejects this request. As Applicants point out, these requests are contrary to
the Merger Policy Statement, and the PaCA offers no compelling reason to depart
from our well-established policy in this area./57/ We further note that should
any subsequent proceeding involving a cost-based wholesale rate increase arise,
at least through 2004, the burden would be initially on Applicants to show that
merger-related costs, unless offset by merger savings, are not included in the
cost support for the rate increase.
Cities contend that Applicants' proposed ratepayer mitigation measures are
inadequate, observing that Applicants' guarantee of no rate increases until 2007
is a guarantee which they already have. They allege that the merger plan,
coupled with: (1) the market power of a large, nuclear-based generating
____________________
56 MAPSA cites to the Application at 9 and Ex. APP-500 at 12-13.
57 See Merger Policy Statement at pp. 30,122-23.
15
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company; (2) the lack of rate protection after the Mission Energy-ComEd contract
expires; and (3) ComEd's failure to increase transmission capacity available to
Cities, poses a significant risk for them./58/
Applicants respond that they have provided Cities with all of the ratepayer
protection to which customers are entitled under the Merger Policy Statement,
namely, that the customers suffer no harm under their present contracts due to
the merger. Nevertheless, as noted previously, Applicants offer Cities an "open
season" under which, prior to the effective date of the merger, either customer
may request ComEd to release it from its contract, with the release to be
effective as of the date the merger becomes effective. This commitment is to
remain open for one year following the effective date of the merger, during
which time the customer, upon 60 days' notice of its decision to cancel, will be
released from its contract. If this option is exercised, Applicants pledge that
ComEd will not seek to recover stranded generation costs from such customer.
Also, Applicants note that the customer would be able to seek transmission
service under the applicable OATT, subject to the appropriate transmission
costs, including any costs associated with switching delivery point facilities.
The Commission notes that Applicants' open season commitment essentially
advances the earliest date at which Cities may exercise open season rights.
Assuming that at the present time neither customer has given 24 months' notice,
the earliest date that either could be released from the present contract is
June 2002. Under Applicants' open season offer, however, a request made at this
time would enable the customers to be released from their contracts as early as
the effective date of the merger, which Applicants hope will occur by September
2000. In addition, after the merger is consummated, the customers would be
allowed to terminate their contracts, with 60 days' notice, at any time during
the next year. There would be no window open for termination from the end of the
first year following consummation of the merger to June 2002. The Commission
presumes (and Applicants do not state otherwise) that if Cities do not act under
the open season offer, they still retain the right to terminate their current
contracts effective every June from 2002 through 2006 (with 24 months notice).
Cities are correct that they have no rate guarantee after their contracts
with ComEd expire. However, they have the flexibility under their present
contracts, coupled with their ability to obtain transmission service from either
ComEd or the Midwest ISO, to acquire alternative, competitively-priced power
supplies as early as June 2002 up to the end of the contract in 2007.
Applicants' open season offer clearly increases the customers' flexibility to
acquire competitive power supplies, without stranded cost penalty, by providing
a window to terminate their contracts that extends from the present time to a
year after the merger. This window covers most of the period prior to the first
date, June 2002, at which they may terminate service under their current
contracts. The Commission believes that the fixed rate nature of Applicants'
wholesale contracts, the opportunity under the requirements contracts to acquire
other sources of power as early as 2002, the hold harmless commitments with
respect to both transmission rates and all wholesale rates and the additional
open season commitment provide adequate ratepayer protection. Accordingly, we
will accept Applicants' commitments in granting approval of the merger.
4. Effect of the Merger on Regulation
As explained in the Merger Policy Statement, the Commission's primary
concern with the effect on regulation of a proposed merger involves possible
changes in the Commission's jurisdiction when a registered holding company is
formed, thus invoking the jurisdiction of the Securities and Exchange Commission
(SEC). We are also concerned with the effect on state regulation where a state
does not have
_________________________
58 Cities allege that ComEd has failed to abide by terms of their existing
power contracts, which Cities contend require ComEd to construct 138 kV
transmission facilities to increase transmission capacity to Cities.
Instead, accordingly to Cities, ComEd has constructed additional 34.5 kV
facilities ComEd answers that Cities agreed to an amendment to the
contracts that essentially permitted 34.5 kV facilities to be installed.
In any event, although Applicants assert that Cities' claim is not
merger-related, they state that ComEd will agree to install 138 kV
delivery.
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authority to act on a merger and has raised concerns about the effect on its
regulation of the merged entity./59/
In this case, as noted earlier, the proposed merger would result in the
formation of a public utility holding company system subject to regulation and
registration under PUHCA. In view of the Ohio Power decision/60/ and the
potential conflict between the SEC's and this Commission's regulation of intra-
affiliate transactions involving non-power goods and services, Applicants have
agreed to waive Ohio Power immunity from Commission regulation of non-power
affiliate sales. In addition, Applicants agree for ratemaking purposes to follow
the Commission's policy regarding treatment of costs and revenues of affiliate
non-power transactions. Applicants further contend that the merger will not
adversely affect state regulation, as both ComEd and PECO will remain subject to
state regulation following completion of the merger.
The PaCA is the only party to raise regulatory concerns about the proposed
merger, contending that unless Applicants are required to waive their Ohio Power
immunity at the state as well as the federal level, state regulatory commissions
will lose jurisdictional oversight. The Commission disagrees that the proposed
merger will have any adverse effects in this regard. In this case, the
Pennsylvania Public Utility Commission (PaPUC) has authority to approve or
disapprove the merger and is currently conducting a proceeding concerning the
merger. Therefore, the PaPUC can condition any approval of the merger as
necessary to ameliorate concerns about pricing of intra-system transactions. The
Illinois Commerce Commission (Illinois Commission) does not have authority to
act on the merger, but has intervened (out of time) in this proceeding. However,
neither it nor any other party located in Illinois has alleged that the merger
will adversely affect the Illinois Commission's regulation of the merged entity.
Accordingly, in light of the facts and commitments stated above, we are
satisfied that the proposed merger will not adversely affect state or federal
regulation.
5. Accounting Issues
Applicants state that the merger will be recorded using the purchase method
of accounting. The pro forma balance sheet provided with the application
reflects approximately $3 billion of goodwill that will be "pushed down" to
ComEd's books. Goodwill is defined by Applicants as the excess of the purchase
consideration over the assumed value of ComEd's assets and liabilities. The
Commission in previous applications has approved the use of the purchase method
of accounting/61/ and the related push down of goodwill./62/ Consistent with
Commission precedent, we will approve Applicants' use of the purchase method of
accounting and the related push down of goodwill.
Although we are approving Applicants' use of the purchase method of
accounting, the filing is unclear as to whether it will be implemented in a
manner that complies in all respects with the Commission's Uniform System of
Accounts requirements. For example, Exhibit C indicates that ComEd plans to
eliminate the accumulated provision for depreciation of utility plant and reduce
the amounts recorded in Account 101, Electric Plant In Service by the same
amount. This is inconsistent with our Uniform System of Accounts requirement
that the amounts in Account 101 be the cost to the first person devoting utility
property to public service with the related accumulated provision for
depreciation stated
_________________________
59 Merger Policy Statement at pp. 30,124-25.
60 Ohio Power v. FERC, 954 F. 2d 779, 792-86 (D.C. Cir.), cert. denied, 498
U.S. 73 (1992).
61 Entergy Services, Inc. and Gulf States Utilities Co., 65 FERC (P)61,332
(1993).
62 El Paso Electric Co. and Central and South West Services, Inc., 68 FERC
(P)61,181 (1994).
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separately and recorded in Account 108./63/ Therefore, ComEd shall comply with
this requirement in accounting for the merger.
In addition, we will direct Applicants to submit their merger accounting to
the Commission within six months after the merger is consummated./64/ The
accounting submission should provide all accounting entries necessary to effect
the merger, along with appropriate narrative explanations describing the basis
for the entries.
The Commission orders:
(A) The untimely motions to intervene are hereby granted.
(B) Intervenors' requests for hearing are hereby denied.
(C) Applicants' Answer is hereby accepted to the extent discussed in the
body of this order.
(D) Applicants' proposed merger is hereby approved.
(E) Applicants shall advise the Commission within 10 days of the date the
merger is consummated.
(F) The foregoing authorization is without prejudice to the authority of
the Commission or any other regulatory body with respect to rates, services,
account, valuation, estimates, or determinations of cost, or any other matter
whatsoever now pending or that may come before the Commission.
(G) Nothing in this order shall be construed to imply acquiescence in any
estimate or determination of cost or any valuation of property claimed or
asserted.
(H) The proposed use of the purchase method of accounting for the business
combination is approved consistent with the body of this order. Applicants must
inform the Commission of any change in the circumstances that would reflect a
departure from the facts the Commission has relied upon in granting this
approval. Applicants shall submit their merger accounting to the Commission
within six months after the merger is consummated. The accounting submission
should provide all accounting entries necessary to effect the merger, along with
appropriate narrative explanations describing the basis for the entries.
(I) The Commission retains authority under Section 203(b) of the FPA to
issue supplemental orders as appropriate.
_______________________
63 Electric Plant Instructions 2 (A) and 5 B(2), 18 C.F.R. Part 101 (1999).
64 Electric Plant Instruction No. 5, Electric Plan Purchased or Sold, and
Account 102, electric Plant Purchased or Sold, C.F.R. Part 101 (1999).
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Appendix A
Interventions in Docket No. EC00-26-000
Allegheny Power
American Public Power Association*
Blackhawk Energy Services, L.L.C.+
Central Illinois Public Service Company, Union Electric Company, and Ameren
Services Company
Consumers Energy Company
Dynegy Power Marketing, Inc.
Electricity Consumers Resource Council*+
Illinois Cities*
Illinois Commerce Commission+
Illinois Industrial Energy Consumers
Illinois Municipal Electric Agency*
MidAmerican Energy Company
Mid-Atlantic Power Supply Association*
National Railroad Passenger Corporation
NewEnergy, Inc.+
Pennsylvania Office of Consumer Advocate
Philadelphia Area Industrial Energy Users Group
Potomac Electric Power Company
PP&L, Inc.
Wisconsin Electric Power Company
Wisconsin Public Power Inc.*
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* protest
+ late filed
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